Archive for August, 2013

As a business starts to consider international expansion, what are some of the key questions and issues management should be addressing first? Here’s a quick list to get you started. Ideally, these questions should lead to MORE questions…Again, this is only the beginning.

What do you intend to sell overseas? Where do you intend to sell overseas? Is there a market for your product in the countries you are considering?

What will your price points be? What are the additional expenses you will incur? What costs will you save? How much do you need to charge to break-even?

Analyze product/service categories and segments. Be prepared to adapt based on the locality.

What barriers to entry exist?

How will you get you profits back?

While building a global strategy, be sure to consider global tax and legal issue during the planning process.

Who will run your overseas operations? Will you have local employees? (assess the labor and payroll laws, costs and taxes) Will you send home county employees abroad? (assess the VISA requirements and timing, as well as the cost of moving and compensating that employee)

Line up local business experts and professionals to help you set up your operations, but understand ALL costs up front.

Understand capitalization requirements and operational funding needs.

Know both home country and host country reporting and compliance requirements.

Plan for and around risk: business risk, currency risk, insurable risks.

Patience. . . don’t forget plenty of patience.

International expansion can be both incredibly time (and money) consuming and challenging. But it can also be incredibly rewarding and lucrative. If it’s worth doing, it’s even more worth doing correctly and well. Seek advice early and often – and when you’re ready, book that trip and make sure your passport hasn’t expired!

Yes, the United States Congress has agreed to delay the commencement of many of the reporting requirements by Foreign Banks resulting from the Foreign Account Tax Compliance Act (FATCA); however, in early June the U.S. and Swiss governments signed a Memorandum of Understanding (MOU) on interpretations of their agreement on implementing FATCA. The initial agreement was signed in February 2013, and despite these two signed agreements, the two countries are still facing key unsettled differences.

FATCA, once implemented, will require foreign financial institutions to report on the assets of U.S. taxpayers to the IRS or face penalties (yes, the U.S. government and the IRS are trying to assess FOREIGN institutions penalties for failure to comply with U.S. laws!). As can be well imagined, FATCA has attracted controversy and protests from foreign banks, and many foreign banks have asked U.S. taxpayers to close their account rather than deal with the reporting obligation required by FATCA. The world’s banks, it appears, really don’t need U.S. investments or deposits.

The MOU summarizes the obligations of Swiss financial institutions, states the relationship with the qualified intermediary system, and confirms the simplified self-declaration for exempt Swiss beneficial owners under the FATCA agreement. Additionally, the MOU states that Swiss financial institutions can generally apply definitions from the implementing provisions of the Treasury Department if these simplify matters relative to the definitions in the FATCA agreement.

Even though implementation of FATCA is delayed, the MOU with Switzerland is seen as a crucial element of international enforcement for the U.S. as the Treasury, Justice Department and IRS have made a priority of uncovering Swiss bank accounts at UBS, Credit Suisse, Julius Baer and other banks. In March, 2013, Wegelin, Switzerland’s oldest bank, agreed to pay $58 million for conspiring to help its U.S. clients and others evade income taxes. In 2009, UBS agreed to pay $787 million as part of a deferred prosecution agreement and later agreed to provide the identities of up to 4,450 U.S.-based clients with undeclared bank accounts. In January 2013, a federal judge ordered the bank to produce information about U.S. taxpayers who were trying to evade U.S. tax by holding accounts at other Swiss banks that did business with UBS.

The IRS began their recent Offshore Voluntary Disclosure Programs (OVDP) for non-reported foreign bank accounts in 2009. Since then, while the IRS has detected several hundred taxpayers who have “quietly disclosed” foreign accounts, the Government Accounting Office reports the number is more likely to exceed 10,000. In their report, Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May Be Missing Continued Evasion, the GAO provided result of its study of the 2009 OVDP (the IRS has held OVDPs in 2003, 2009 and 2011 and has an ongoing initiative which began in 2012).

Under an OVDP, taxpayers have been allowed to apply to the IRS, and if they qualify can disclose their foreign accounts, pay taxes, interest and tax-related penalties for open years. In exchange for waiver of criminal prosecution, the taxpayer paid a percentage of the maximum value in the foreign accounts over the program period (2009 was a 20% penalty, 2011 held a 25% penalty and the ongoing 2012 program holds a 27.5% penalty).

2009 Results: According to the GAO, 19,337 taxpayers participated in the 2009 initiative and 10,439 cases have been closed. The average offshore penalty assessed was about $376,000. Half of the participants had accounts in Switzerland. About half of the $4.1 billion in total revenue collected under the program (as of the end of 2012) was from a mere 378 cases. In all OVDI programs thus far, more than 39,000 disclosures have been made and more than $5.5 billion in revenue has been collected.

Quiet Disclosures: The GAO reviewed amended or late filed returns and Foreign Bank Account Reports (FBARs) filed for 2003-2008 (the years of the 2009 OVDP) and found 10,595 taxpayers who might have “disclosed quietly”. Of those, 3,386 made late or amended tax filings for multiple years and 94 filed for all six tax years.

New Reporting: The GAO report also estimated the number of taxpayers newly reporting existing foreign bank accounts by reviewing both Form 1040, Schedule B, Interest and Dividends, which has a question regarding foreign bank account as well as FBAR filings from 2003 through 2010. The number of taxpayers reporting a foreign bank account on Schedule B more than doubled to 515,635 between 2003 and 2010, from approximately 1% of all taxpayers to more than 2.5% of all taxpayers. Similarly, the number of FBARs filed tripled to 618,134, and more than doubled between 2009 and 2010!

The sharp increase in compliance during a global economic crisis but surrounded by increased publicity regarding the IRS Offshore Programs has led the GAO to question whether some of the taxpayers who have quietly disclosed or are newly reporting have attempted to circumvent the taxes, interest and penalties which would otherwise be owed. The IRS agreed with the GAO recommendations that it needs to more effectively detect and pursue quiet disclosures and previously unreported foreign accounts, as well as better educate taxpayers regarding compliance requirements.

When eating in a foreign country and culture, you expect to discover new and different foods. 30 years ago, I spent a year in Norway as a foreign exchange student. I tried everything at least once. I didn’t expect to like everything, but I also learned to enjoy and appreciate many new foods. I won’t write this post about all of the truly odd and different foods I’ve tried around the world, but will stick to some key ingredients and combinations I discovered while living in Norway for a year—and then returning for a visit 30 years later.

What did I try ONLY once? Lutefisk – cod cured with lye. When you cook this your pans turn black. Often served with melted butter or bacon grease (a waste of either in my humble opinion). While fresh (and even salted) cod is delicious, avoid Lutefisk!

Some items are quite traditional and I tried them more than once, but never really enjoyed: pickled herring, herring in sour cream, and herring in mustard sauce. I tried it back then. I tried it again this year. Still don’t like it (I think it’s a texture thing for me, but that might be too much information).

What did I try and enjoy? Geitost – a strong dark brown goats’ milk cheese. Very traditionally Norwegian, served on buttered bread with marmalade (a typical breakfast or lunch item). I will admit this is definitely an acquired taste, as the cheese is very strong (but not at all like stinky French Camembert or Limburger).

What surprised me in 1982 and again in 2013 was the combination of foods and ingredients. In 1982, I discovered strawberry jam on cornflakes, raspberry jam on Jarlsburg (a Swiss-type) cheese (actually both are and they are both really quite good!). But was I surprised to learn that when eating pizza, the Norwegians put not only ketchup, but also sour cream dressing on top! I tried it, but I can’t really recommend it. Give me oregano and red pepper flakes instead.

The items in this blog are informational only and are not meant as professional advice. Consult with your tax advisor to determine how any item applies to your situation. Kimberlee Phelan writes Where In the World, and any opinions expressed or implied are not necessarily shared by anyone else at WithumSmith+Brown.

Author

Kimberlee S. Phelan, CPA, MBA, specializes in international tax, concentrating her efforts on special projects involving corporate tax research and planning, as well as inbound and outbound international structuring for corporations and individuals. She is actively involved in Withum’s international affiliation of firms, HLB International, serving as the co-chair of the HLB North America Tax Services Group as well as co-chair of the HLB International Tax Committee.

Having travelled to over 40 countries, Kimberlee will write about her experiences in this blog, highlighting interesting discoveries, tax and accounting law changes, as well as important business and etiquette tips.